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CBO Releases Score of Homeowners' Defense Act (H.R. 2555)

The Congressional Budget Office estimates that H.R. 2555, the Homeowners' Defense Act, will cost the federal government $1.7 billion over five years (2011-2015). The goal...
June 9, 2010

The Congressional Budget Office estimates that H.R. 2555, the Homeowners' Defense Act, will cost the federal government $1.7 billion over five years (2011-2015). The goal of the bill is to increase the availability and affordability of homeowners' insurance by improving the ability of certain state-sponsored insurers and reinsurers to access resources to pay claims following a natural disaster. The legislation authorizes appropriations to establish a federal disaster reinsurance program and allows the Treasury Department to enter into commitments to guarantee the principal and interest of bonds issued by eligible insurers and reinsurers following a disaster.

The bill authorizes $75 million to provide grants for state and local governments to help mitigate losses from natural disasters and CBO estimates that $700 million would be appropriated to the new federal reinsurance program for this purpose as well. $100 million will go toward establishing a National Catastrophe Risk Consortium. The Consortium would be a federal entity managed by a board of directors made up of designees from the Departments of the Treasury, Commerce, and Homeland Security, and members of participating states that operate or have authorized a natural catastrophe or residual market insurance entity.

Responsibilities of the consortium would include gathering risk and insurance information, conducting research and analysis into the standardization of risk-linked securities and facilitating different avenues for risk transfer to the private market. Pay-as-you-go procedures do not apply to this legislation because it would not affect direct spending or revenues.

The CBO expects that several existing insurance entities would be eligible to purchase reinsurance or obtain debt guarantee commitments from the Treasury under the bill over the next 5 years. Examples include the Florida Hurricane Catastrophe Fund (FHCF), the California Earthquake Authority (CEA), the Texas Windstorm Insurance Association (TWIA), Louisiana Citizens Property Insurance, and other state Fair Access to Insurance (FAIR) plans. Actuaries from Florida Citizens Property Insurance acknowledged that they are charging below actuarially sound premiums and therefore would not be eligible for either of the new Treasury programs during the next five years. CBO estimates that eligible entities would seek about $7 billion in reinsurance coverage from fund in 2012 (the first full year that the fund would be effective under the legislation). CBO estimates that premiums charged for the federal reinsurance program would be inadequate to compensate the government for the cost of that coverage.

What It Means to Agents: The PIA National Natural Catastrophe Working Group has been monitoring this legislation and provided comments to our legislators and regulators. We are fully supportive of the provisions in this bill that would enhance mitigation; however, we are concerned that a federal consortium to assist state funds, combined with Treasury guarantees, could crowd out parts of the private insurance market. PIA members believe that natural catastrophe risk should be placed in the insurance market - not on taxpayers.